Swedish Pension Reform

Sweden is widely considered a cradle-to-grave welfare state, but that is somewhat misleading. The burden of government is significant, to be sure, but there have been some impressive market-oriented reforms. Sweden, for instance, has eliminated its death tax and implemented school choice.

Perhaps most surprising, Sweden has partially privatized its Social Security system. The amount going into private accounts is small — just 2.5 percent of earnings, so the system is not nearly as good as Chile’s, but it is much better than the American system.

In addition to small private accounts, Sweden also has created a direct link between taxes paid and benefits received. This shift to a “notional” defined contribution system represents a significant departure from traditional Social Security systems, which are akin to defined benefit schemes containing widespread redistribution.

The Wall Street Journalreports that the Swedish reform is inspiring other nations to move in a similar direction:

By pegging public pensions to individual earnings and overall life-expectancy rates, Sweden has given its citizens incentives to be more productive and retire later — and sidestepped the political paralysis that has stymied change elsewhere.

Some Eastern European nations have already ditched their struggling post-Communist systems and gone Swedish. Steps taken in countries as diverse as Brazil and Russia boast some Swedish elements. A World Bank book based on the Swedish model has been translated into Chinese.

…[C]alculating payouts according to salaries and aging projections gives [the Swedish system] the flexibility to accommodate revenue and population shifts. If the economy does poorly, the thinking goes, future pension payments will go down. And the longer people in a particular age group are projected to live, the smaller their pension payouts will be.

…The bottom line of the Swedish model: Most people will have to work harder to reap the kinds of pensions their grandparents could take for granted. “It puts the cost of aging onto the individual, rather than onto society,” says Sarah Brooks, an Ohio State University political-science professor who has studied the plan.